Friday, 30 April 2010

The common one used in banks is the Bai Bithaman Ajil(BBA). Lately I came accross with Musyarakah Mutanaqisah(MM) which is more reasonable.. any advices?Firstly, I would like to make my position clear that currently I am just a student of Islamic Finance and Management. I am not a "qualified expert" yet (insha'Allah I would be in the position later) to give a proper comment on this issue, but as an individual I do have my personal opinion on this issue.

BBA is widely used in Malaysia and probably also in Brunei. In respects of the Shari'ah scholars I will firstly give their brief opinion on BBA. Majority scholars feels that BBA is not the original concept of BBA. The practised BBA is diverted from its original concept.

From my perspective there are a few issues about BBA that needs to be addressed. Firstly, the problem on the ownership of the asset. There will be confusion on wether who is entitled to the beneficial ownership of the asset and who is entitled to get the legal rights.

Then, there is the problem if the client is unable to pay the debt(deferred payment) to the bank. The bank has the right to auction the property away and if the auction price or value is less than the value that is agreed between the bank and the client, the client still have to pay the remaining balance. My opinion is that logically, if the client who doesn't have the money to pay the debt, would definitely not have the money to pay the remaining balance to the bank. So, the design of this contract seems dodgy to me. One should be careful before signing such contract because if you've signed it, it means that you have an agreement with the bank to go through such things.

If the property development is being abandoned, the burden is on the client as he/she still have to pay the deferred payment to the bank. All the risk is being put onto the client if anything goes wrong. In other words, if something goes wrong the client will be put on blame which in my opinion, every party should be held responsible. Even though BBA is not a risk/loss sharing investment between the bank and the client, it is more like a sale contract. The "Islamic bank" is allowed to get certain amount of profit because of the risk the "Islamic bank" takes. If the bank doesn't take any risk, then it resembles to riba (the legal maxim & also hadith :"al kharaj bi ad-dhaman" which means no gains/reward/profit/income when there is no risk/responsibility). So, again I would like to emphasise that every party should be responsible of any loss or gain.

This figure shows the mode of financing "Bai al-inah" which also resembles BBA. If you refer to the BBA figure "Bai al-inah" resembles in the step 2 and step 3 in BBA. Shari'ah prohibits the combination of two agreements in one transation or contract. It should be done seperately. In "Bai al-inah" and BBA, one could see that buying and selling is being done in one contract. In my opinion, the Shari'ah prohibits the combination of two aggreements in one transaction is because of the hadith which was narrated by Abu Hurairah radiallahuanh : "Allah's Messenger salallahualaihiwassalam forbade selling by Mulamasa and Munabadha. " Munabadha means agree exchanging items without seeing or checking the item. Hence, if the product has problem/defects/undeveloped in the first agreement, it will consequently affects the second agreement. Where else if it is being done in a seperate contract, one could always get a different supplier if there was a problem with the product and would avoid a chain reaction effect.

Musharakah Mutanaqisah or in other words diminishing musharakah, is another way to do asset financing. Generally, this is how the financing is done; a client wants to buy a property and seeks financing from a bank. The bank will buy the asset and then rent it out to the client. The client will also need to pay a percentage of the asset on top of the rent. This will go on until the client fully owns the asset. For example, the bank buys the asset and fully owns it. The bank rents it out to the client for £500. On top of that the client needs to add another £100. This £100 is for the ownership of the asset. Let's say the £100 will get 10% of the ownership of the asset. So the bank ownership of the asset is being reduced to 90% and the client owns 10% of the asset. The contract will go on as agreed between the client and the bank until the client fully owns the asset. Before the term ends, the asset is own by both the bank and the client therefore they are both responsible for the asset.

My personal opinion on this issue is that Musharakah Mutanaqisah is definitely a better choice of asset financing. I do not want to say that BBA is "haram" as I am not in the position to do so. I would not want to prohibit the unprohibited. That can only be done by the Lawgiver(Allah) and I hope to be humble as I can be, to be a person who gives an opinion and advice.

Wednesday, 21 April 2010

Recently, I have encountered a few brothers discussing about Islamic banking and some don't really understand what Islamic banking is all about and they're having doubts about it. The doubts are to the extent where one brother believes Islamic banking is created to manipulate the people and create a new market. In this entry I will try and explain the historical evolution of Islamic banking to the extent of knowledge given to me.

Generally Islamic banking accepts almost all kind of transactions except any transactions that deals with riba(interest) and gharar(uncertainty). Why doesn't it accept riba(interest) and gharar(uncertainty)? The law is being extracted from the Holy Qur'an and the Sunnah/Hadith.

"Those who devour interest, they behave as the one whom Satan has confounded with his touch seized in the state they say : " Buying and selling is but a kind of interest," even though Allah has made buying and selling lawful and interest unlawful. Hence he who receives this admonition from his Lord, and then gives up (dealing in interest), may keep his previous gains, and it will be for Allah to judge him. As for those who revert to it, they are the people of Fire and in it shall they abide." ( Surah al-Baqarah verse 275)

"Allah will deprive usury of all blessing, but will give increase for deeds of charity: For he loveth not creatures ungrateful and wicked." (Surah al-Baqarah verse 276)

"Truly the reward of those who believe and do righteous deeds and establish Prayer and pay Zakah is with their Lord; they have no reason to entertain any fear or grief." (Surah al-Baqarah verse 277)

"O ye who believe! Fear Allah, and give up what all outstanding interest, if ye are indeed believers." (Surah al-Baqarah verse 278)

"If the debtor is in a difficulty, grant him time Till it is easy for him to repay. But if ye remit it by way of charity, that is best for you if ye only knew." (Surah al-Baqarah verse 280)

"That they took usury, through they were forbidden; and that they devoured men's substance wrongfully; we have prepared for those among them who reject faith a grevious punishment." (Surah al-Nisa verse 161)

"Whatever you pay as interest so that it may increase the wealth of people does not increase in the sight of Allah. As for Zakah that you give, seeking with it Allah's good pleasure, that is multiplied manifold. (Surah al-Rum verse 39)

The sequence of these revelation on riba thath came to our Prophet Muhammad Salallahu Alaihi Wassallam starts with the verse from Surah al-Rum, al-Nisa, al-Imran and al-Baqarah. Riba is understood by the Prophet Salallah Alaihi Wassallam and has taught us certain ways to avoid it through his sunnah ad hadith. Evolution has forced a lot of changes hence, riba also evolves. The important thing is that we have to understand riba and gharar and it is not something that people have created in recent times. The question here is, is it being conducted or practiced correctly?

Here are some verses from the bible on interest.

"If one of your countrymen becomes poor and is unable to support himself among you, help him as you would an alern or a temporary resident, so he can continue live among you. (36) Do not take interest of any kind from him, but fear your God, so that your countryman may continue to live among you. (37) You must not lend him money at interest or sell him food at a profit." (Leviticus 25:35-37)

(19)"Thou shalt not lend upon usury to thy brother; usury of money, usury of victuals, usury of any thing that is lent upon usury." (Deuteronomy 23:19)

"If thou lend money to any of my people that is poor by thee, thou shalt not be to him as and usurer, neither shalt thou lay upon him usury." (Exodus 22:25)

(35)"But love ye your enemies, and do good, and lend, hoping for nothing in return; and your reward shall be great, and ye shall be the children of the Highest: for he is kind unto the unthankful and to the evil." (Luke 6:35)

The followers of the bible have then understood these verses of prohibition on interest as; if a person is being oppressed of poor. They argue that it is permissible to charge interest to the rich or capable. John Calvin a precher in the 1500s claim that there is no problem on the interest as long as it doesn't bother the poor. I'm not going to through this in detail here.

So, conventional banking has no boundaries for it to be developed or evolve where else, Islamic banking has to be cautious on the development so that the prohibited will be avoided. Colonisation had an incredibly detriment affect on Islamic countries as noted by AbdelKader Chachi (2005). This occurred through disruption to the Islamic societies, which inevitably lead to Muslims being pushed away from the initial teachings of Islam. Subsequently, this leads to the stagnation in Islamic politics and economics, hindering the evolution of Islamic banking.

The recent Islamic banking industry is actually a mixture of conventional banking and the theoratical practices of Prohphet Muhammad within the constraints of permissible action which evade the prohibitions of interest and etc. For this reason, Islamic banking is always bound to have misconduct practices.

I am going to express my thought in interest. If one were to calculate for example £1 is borrowed at 5% interest in 1000 years, the new total would be £1,546,318,920,731,950,000,000. Look at the big difference! Logically no one would make a loan for 1000 years but a person would apply for a loan for thousands or millions of £ in a shorter time length. So my question is, is it fair to be paying and earning interest? Obviously, everyone is entitled to their opinion but my personal opinion is a definite NO. This is unfair because one can earn money without even doing anything.

Let us make a situation where one wants to buy a car. One buys a car through conventional banking and the car cost £5000. The person applies for a loan from the conventional banking to buy the car. The bank agrees to approve the loan of £5000and expect a repayment of £5000 plus the interest. Let's say the total of repayment after 3 years is £7000.

The same situation but in Islamic banking. The person applies for a bank to buy the car for him and he will settle the payment with the bank in deferred payments. The bank agrees to buy the car for £5000 and sell it to the person for £7000 and the settlement is after 3 years. This transaction is called Murabaha, where the cost of the product and the profit margin is known to the client. Both have the same amount, so what is the difference?

In conventional banking, if a person misses a payment there is a recalculation of interest. The bank loans out the money to earn more money.

In Islamic banking, if the person miesses a payment, the same amount of payment still have to be carried out but the client may be charged a penalty and this penalty should not go to the bank but to a charity(this is a lengthy topic so I'm going to cut short). The bank actually buys the car from the supplier and delivers it to the client. In other words, the bank is conducting a trading. So the bank actually holds the risk where the bank has to deliver the car to the client and is responsible if anything happens to the car before it reaches the client, therefore the bank is entitled to earn some profit from the trading. There is a Hadith which says " Al kharaj bi al-dhaman" which means "no risk, no gain/reward/income/profit". Even though both look similar, but it is actually different. But do Islamic banks really conduct in this manner remain quesntionable. I hope this entry has given some exposure to everyone.

Wednesday, 14 April 2010

The Holy books were provided by Allah to His messengers as a guidance for the community at that certain point of time. Originally there was only one religion. As time passes by people got confused and therefore Allah sent His messengers and sent His words for the people to be guided back to the right path.

"And remember We gave Moses the Scripture and the Criterion (Between right and wrong): There was a chance for you to be guided aright." (Quran, Al-Baqarah verse 53)

"Mankind was one single nation, and Allah sent Messengers with glad tidings and warnings; and with them He sent the Book in truth, to judge between people in matters wherein they differed; but the People of the Book, after the clear Signs came to them, did not differ among themselves, except through selfish contumacy. Allah by His Grace Guided the believers to the Truth, concerning that wherein they differed. For Allah guided whom He will to a path that is straight." (Al-Baqarah, verse 213)

"Or do they envy mankind for what Allah hath given them of his bounty? but We had already given the people of Abraham the Book and Wisdom, and conferred upon them a great kingdom." (Al-Nisa, verse 54)

Who sets the guidance to mankind or to the community? If a ruler sets the law and the community as a whole agree on something to construct their law, it might be applicable only towards that community because of their tradition or customs. Since they are a community, it would be easier for them to accept the law. For example, it might be modest for a lady to wear a short skirt in Western culture but it might not be offensive for a lady to wear a short skirt in the Arab countries. Why is that so? Is it because of the customs and traditions? Is it because they follow the law from the Holy Quran? An ayah from the Quran mentions about ladies limitation on exposing their body in public. In Islam man also cannot exposed their body too much. It is understood that man are more physically capable to do labour work hence they are allowed to expose slightly more flesh compared to a lady. There is always a wisdom on why the body should not be over exposed. Our creator has warned us to not expose too much of our flesh/body. Certain community has accepeted and tries to adapt it as their custom. Many argues that the words in the Quran is made up by a human being (Prophet Muhammad Salallahu Alaihi Wassalam). If that is so, what benefit does it give to him to set such a law? Obviously it will not benefit him in any way by asking all mankind to do certain things. Since the law in the Quran is NOT 'man made' it is then made by the creator to suit and benefit ALL mankind.

Take for instance the news on French President Nikolas Sarkozy who called for a ban on hijab.France have the estimated population of 5 million muslims and the interior ministry says JUST 1,900 women in France wear the full veils. The number might just be 1,900 and they are afraid that it might spread to the rest of the 5 million muslims. They are afraid to be labelled as an Islamic country rather than their proudly secularise government. Why not make it compulsory for every women to wear hijab? Hijab does not neccessarily represent Islam. Anyone can wear a hijab (headscarf) without being a muslim. (http://news.bbc.co.uk/1/hi/world/europe/8480161.stm)

Here are some ayah from the Quran about hijab.

“O you Children of Adam! We have bestowed on you raiment to cover your shame as well as to be an adornment to you. But the raiment of righteousness, that is the best. Such are among the Signs of Allah, that they may receive admonition.”(Surah al-A'raf verse 26)

"Say to the believing man that they should lower their gaze and guard their modesty; that will make for greater purity for them; and Allah is well acquainted with all that they do." (Surah Noor verse 30)“And say to the believing women that they should lower their gaze and guard their modesty; that they should not display their beauty and ornaments except what must ordinarily appear therof; that they should draw their veils over their bosoms and not display their beauty except to their husbands, their fathers, their husbands' fathers, their sons, their husbands' sons, their brothers, or their brothers' sons or their sisters' sons, or their women or the servants whom their right hands possess, or male servants free of physical needs, or small children who have no sense of the shame of sex, and that they should not strike their feet in order to draw attention to their hidden ornaments. And O you Believers, turn you all together towards Allah, that you may attain Bliss.” (Surah Noor verse 31).

"Those who harass believing men and believing women undeservedly, bear (on themselves) a calumny and a grievous sin. O Prophet! Enjoin your wives, your daughters, and the wives of true believers that they should cast their outer garments over their persons (when abroad). That is most convenient, that they may be distinguished and not be harassed. And Allah is Oft-Forgiving, Most Merciful." ( Surah al-Azhab verse 58-59)

There's a tradition in Spain where they have a festival for throwing tomatoes everywhere. It might be acceptable in their country to do so. Imagine if that custom or tradition were being applied in a third world country; where food is insufficient. Of course people from the third world country will find it bizarre and would certainly not throw or waste the tomatoes. So who is entitled to guide mankind? A man? or Non other than our Eternal and All Knowing Creator?

These are only a few examples of why Quran is important. Insha'Allah this would be a step to open our mind and heart to accept each and every word sent to us to guide through our life. This is a reminder not just for the readers, but also a reminder to myself and my family.

Tuesday, 6 April 2010

How would you respond to the claim that Islamic money is gold and silver and that Muslims should support an international return to the gold standard?

Money that is being dealt today has given us a lot of benefits and also giving us problems that are affecting most parts of the world with the financial crisis bubble burst. Comparison between gold or silver and fiat money or paper money will be done so that the pros and cons will easily be evaluated in the perspective of economics and Sharia’.

3) Islamic perspective on money

In the period of the rising of Islam, gold and silver was used as a common medium in trading. Most of the Arabs were businessman and traders, they were not known of craftsmanship so the Arabs dealings were always conducted in gold and silver as they have nothing else of significance in high demand to be used as money.

Early Muslim scholars considered gold and silver as the natural money or money by creation. Given that fiat money has replaced gold and silver, Muslim scholars have equated the modern fiat money with the jurist rules of gold and silver. Consequently, all kinds of prohibited interest or riba on gold and silver, as well as all conditions or requirements of zakah on gold and silver have been passed to fiat money.

There is not much being said in the Islamic perspective on gold and silver as generally Islam does not really endorse on the usage of gold and silver or even opposes on the usage of fiat money. There is a hadith by the Prophet salallah alaihu wassalam that interprets most miserable is the servant of Dirham and Dinar which emphasises on the usage of gold and silver which warns us on not to be obsessed in using gold and silver . It is undoubtedly that gold and silver may lead us astray due to its inherent value but it is a reminder for us so that we will not hesitate when spending gold and silver or money and always be a servant of Allah (god) rather than the servant of gold and silver.

If paper money was a debt of real wealth of gold and silver, it would not be allowed because of the prohibition from one of the Prophet’s Hadith about any transactions in gold, silver, wheat, barley, rice and dates is to be done on the spot and hand to hand. If the paper money represents gold, therefore this transaction goes against the hadith as the gold is not being transferred from one person to another.

4) Fiat money

Generally, the value of money is determined by the law of supply and demand which has been said by Ricardo “the value of money is not determined by the labour time its substance embodies, but by the law of supply and demand only.” If money is being over produced but it is low on demand, the value of the money will depreciate tremendously. The United States of America dollars is being over produced but it is being supported by most parts of the world which makes it high on demand even though it is over produced for the capacity of its nation.

Generally fiat money will always be spent due to its specific purpose as a medium of exchange and because of its depreciating value. Time value for money will have an effect here, so people will tend to get rid of the fiat money in a shorter period compared to gold and silver. The disadvantage here is that when fiat money is over spent it will then lead to debt. Too much debt will create crisis which will affect the communities which has been experienced frequently with the likes of United States of America in recent times. Hence, it will create a bigger gap between the rich and poor which leads to a bigger disastrous effect.

Fiat money also has an advantage if it is conducted in Islamic law which eliminates riba or interest, which is proven in recent history that it is achievable. It is also possible to do it with gold and silver if it is being conducted in Islamic law as well. Both are prone to interest but it is illogical to implement it with gold and silver due to its limited resources.

Fiat money is widely known due to its liquidity. It is easily measured and managed because of its size and weight compared to the gold and silver which is a hassle to manage because it is bulky and heavy to be transferred around. This is certainly a big advantage to the fiat money and one of the reasons that the fiat money was created.

5) Gold and silver

Gold and silver are resources from the earth in contrast to the fiat money which is produced by human. Humans cannot over produce the gold and silver as it is a limited resources from the earth. This will be beneficial as it cannot be over produced but it can also be a disadvantage as it is limited and demand will only rise as the population of the world is ever growing. Although so, the higher demand for gold will only make it more valuable which makes it more stable than fiat money as history has shown it has been depreciated.

Comparing gold and silver with fiat money, the stability value of gold has always been superior in comparison to the depreciating fiat money. As mentioned by Luthfi Hamidi, one troy ounce of gold was equivalent of US dollar 1,939 in the year 1800. In 2004, one troy ounce of gold is equivalent to US dollar 455,757.This is because the US money production of the US dollar is ever growing but gold is not being over produced for the last 204 years. Gold resources are limited but the demand is growing through the population of the world and therefore makes it value appreciated and not be depreciated. It is better to leave it in the hands of god rather than in the hands of another human being or government which can or able to manipulate the value of money.

Using gold and silver as a medium of circulation could make people feel reluctant to spend or use it in circulation. People would rather keep the gold and silver due to its inherent value. This will be a disadvantage because it might not satisfy the equation of quantity theory of money which is V=Y/M. V represents the average velocity of circulation, might not be adequate due to hoarding gold. Where else fiat money has the advantage here, as it has a specific function which is to be spent in exchange of goods and services. If one decides to keep the fiat money, it is because to save up until it reaches certain amount and only to be spent in a larger amount.

People have the tendency to feel reluctant to spend unnecessarily with gold and silver, debts will be kept at a minimal and therefore may avoid being in a financial crisis. With gold and silver, it will make people more aware and only spend on necessities. Financial growth will take on a slower pace but will be considerably more stable compared to the usage of fiat money.

Due to the facts that of the usage of gold and silver people are more reluctant to spend it, it will lead on to a higher interest rate. People will be afraid to let their valuables go, therefore demanding a higher interest rate when loaning it out. Contrast to the fiat money, even though people would willingly loan it out, it will be on a lower interest rate. Interests are commonly known to be prohibited in Islam as being mentioned in the holy Quran. (2:275)

Gold and silver are limited resources therefore it will be illogical for one to demand more than what is available. In a way it can somehow stop people on dealing with interest or riba. In contrast to the fiat money which is always being produced, one can always demand on interest because the supply will usually meet its demands. Even though these interest are at a smaller percentage, too much of these small percentage of interest will add up to a big amount that can be unsustainable.

Conclusion:

Gold cannot be implemented as gold reserve standard because of the prohibition from the Prophet that gold has to be exchange from one to another on the spot. Therefore if one were to endorse the usage of gold as money, it cannot be gold reserve standard but has to be the physical gold itself.

Gold resources might be sufficient to be used commercially but the issue is that if the average velocity of gold circulation is adequate to fit in the quantity theory of money equation which is V = Y / M, as people naturally will hoard gold rather than spending it generously.

Gold would give a trade-creating effect which is positive rather than fiat money which gives a debt-creating effect that will lead to financial crisis. The important thing for the Islamic Economic System is to get back to the trading side and not to the debt-creation side. Islam generally encourages us to do trading and avoid debts.

The important goals of monetary policy in an Islamic economy:-

Ø“Economic well-being with the full employment and optimum rate of economic growth;

ØSocio-economic justice and equitable distribution of income and wealth; and

ØStability in the value of money to enable the medium of exchange to be a reliable unit of account, a just standard of deferred payments and a stable store of value” .

Gold would fit in this monetary policy as a stable in the value of money.

Gold and silver are not necessarily money from the Islamic perspective and Muslims should not support an international return to the gold standard. However gold and silver may be implemented as money if gold minting is being used. Fiat money can also be used from the Islamic perspective but it would be better if fiat money were to be more stable and perhaps new solutions for the fiat money through evolution could be ideal money.